Skip to the content

The future winners of the UK equity income sector

31 October 2014

F&C’s Gary Potter tells FE Trustnet why he shuns the highest profile names within the UK equity income space and instead focuses on the newest entrants to the sector.

By Alex Paget,

Senior Reporter, FE Trustnet

Ardevora UK Income and Majedie UK Income are two of tomorrow’s winners within the IMA UK Equity Income sector, according to F&C’s Gary Potter, who avoids the sector’s household names due to their size and unwieldy nature. <

Potter, who heads up the F&C multimanager range with Rob Burdett, is a big fan of UK equity income funds and uses a number of them within his portfolios. However, notable absentees from the list are the multi-billion Invesco Perpetual, Artemis and Woodford funds.

ALT_TAG The reason for that, according to Potter, is because large funds are unlikely to replicate their strong past performance relative to the sector and index because their managers are unable to manoeuvre the portfolios like they had done in the past.

Because of that, he and his team attempt to search out the funds which will be the most sought after in a few years’ time, but are currently small, nimble and can outperform as a result.

“What we want to do for our investors is give them exposure to future top-performing funds by buying tomorrow’s winners instead of just continuing to buy yesterday’s winners,” Potter (pictured) said.

“Some of the equity income sector’s incumbents are large and, though they are run by good managers, they have collected a lot of assets over the years. I’m not taking anything away from [the managers of large funds’] ability, we just prefer the dynamism of smaller funds.”

Potter’s analogy for small and large funds centres on yachts against huge cruise liners. While the cruise liners are impressive, they are nowhere near as manoeuvrable as smaller boats.

Much has been said about the impact a fund’s size has on its performance. Though a recent FE Trustnet study showed that smaller funds have tended to outperform their larger rivals over the last five years, there is no definitive answer to show that it was purely down to their differing assets under management.

Performance of composite portfolios vs sector since Feb 2009

ALT_TAG
Source: FE Analytics

However, Potter says it all comes down to the balance of probability.

“The big question is ‘do I want to keep buying the incumbents or do I want to buy the new entrants?’”

“Although they are relatively new funds, they aren’t run by relatively new managers. It means we are buying comparatively small funds and they are run by experienced managers; that’s what we want to do in our funds.”

With that in mind, Potter highlights two funds which he thinks will be tomorrow’s winners in the IMA UK Equity Income sector.




Ardevora UK Income

Potter describes Jeremy Lang and William Pattisson’s Ardevora UK Income, which was launched in January 2011, as one of the best examples of “new breed” equity income funds.

According to FE Analytics, the £233m fund has been the sixth best performing portfolio in the 78-strong sector since its launch with returns of 49.19 per cent. It is a benchmark agnostic portfolio, but as a point of comparison the FTSE All Share has returned 26.55 per cent over the period.

Performance of fund versus sector and index since Jan 2011

ALT_TAG

Source: FE Analytics

It turned in top quartile returns in 2012 and 2013, but is currently underperforming in 2014.

Lang says a major reason for that is because he and Pattisson tend to avoid mega-caps, which have led the market this year, as they have a high weighting to the smaller names in the FTSE 100, FTSE 250 and the FTSE Small Cap.

Potter had invested with Lang and Pattisson when they were at Liontrust and was an early backer of their new fund. Potter particularly likes the fund because of the managers’ innovative approach to the UK equity market.

Their strategy revolves around cognitive psychology and the belief that people in financial markets – be it company management teams, analysts or investors – are prone to making predictable mistakes, errors of judgement or biases.

They then try to exploit those mistakes to create opportunities. To find out more about the strategy, click here.

“It has performed well and they have a good process which is different to most other conventional fund managers,” Potter said.

The fund has a yield of close to 4 per cent, but it is worth noting that Lang and Pattisson don’t target yielding stocks. They look for stock anomalies and when they have a complete portfolio, they will put more money into the highest yielders and less into the lowest yielders.

The companies they invest in do tend to pay special dividends, however, as managements try to attract investors back to their company.

Ardevora UK Income has an ongoing charges figure (OCF) of 0.93 per cent.




Majedie UK Income

Potter is also a big fan of the Majedie UK Income fund, which is headed up by FE Alpha Manager Chris Reid.

Reid had been working within the investment management sector for 10 years prior to launching his £500m fund, which is predominantly a FTSE 350 portfolio, in December 2011 and, so far, he has not disappointed investors.

According to FE Analytics, it has been a top decile performer in the sector since its launch with gains of 72.71 per cent, beating its benchmark – the FTSE All Share – by more than 30 percentage points in the process.

Performance of fund versus sector and index since Dec 2011

ALT_TAG

Source: FE Analytics


It was top quartile and beat the index in 2012 and 2013 and is also outperforming in this year’s falling market with returns of more than 4 per cent.

Potter describes Reid as a more conventional active manager than Lang or Pattisson but points out that no one investment style is better than another, they are just different and will outperform at different stages in the cycle.

Reid’s style is to buy out-of-favour stocks that have a catalyst for positive change. However, he points out that it is an “improvement”, not “recovery”, fund.

By that, he means he won’t hold any companies that aren’t paying a dividend. Furthermore, he won’t by a company just because it’s out-of-favour or a turnaround story; he wants to see that change has already started and that they are therefore strong enough to pay a dividend.

Reid is still looking for stocks that he believes are undervalued by the market and where growth is underestimated, but he is willing to be patient and collect the dividend. He describes this as being “paid while he waits”.

Potter also likes the fact that Reid is already thinking about the size of his £500m fund.

“He has already said that he wants to cap the fund when it reaches £1bn as he wants to protect his investment strategy and that gets a tick from our side of the fence,” Potter said.

Majedie UK Income has a yield of 3.8 per cent and an OCF of 0.78 per cent.

ALT_TAG

Editor's Picks

Loading...

Videos from BNY Mellon Investment Management

Loading...

Data provided by FE fundinfo. Care has been taken to ensure that the information is correct, but FE fundinfo neither warrants, represents nor guarantees the contents of information, nor does it accept any responsibility for errors, inaccuracies, omissions or any inconsistencies herein. Past performance does not predict future performance, it should not be the main or sole reason for making an investment decision. The value of investments and any income from them can fall as well as rise.